In dismissing the super-high natural gas prices registered at the California border during the western energy crisis, the Federal Energy Regulatory Commission appears to have forgotten all their previous arguments for a competitive market which allocates commodities and signals — through prices — where supplemental supplies are needed.

In the FERC staff’s market study released Aug. 13, the delivered-to-California prices reported by various publications, including NGI’s weekly and daily pricing publications, were trashed, in part because they spiked very high during the time period in question and did not correlate well with the Henry Hub prices (see Daily GPI, Aug. 14 & Aug. 15). Staff concluded there were “preliminary indications” the California prices must have been manipulated because western producing basin prices during the October 2000 through June 2001 time period did track Henry Hub prices.

In attempting to dismiss the delivered-to-California price spikes as the product of manipulation and poor price surveys, the Commission staff is ignoring a market signal big enough to build of a 900 MMcf/d Kern River Pipeline expansion, plus numerous other projects recently aimed at the California market. Luckily for California, others did not ignore the signal. Possibly, however, in view of FERC’s latest inspiration, construction should be halted.

If potential pipeline sponsors had adopted FERC’s rationale, the 1.2 Bcf/d Alliance Pipeline from Canada would not have been built. That project succeeded after Chicago citygate prices spiked as high as $40/Mcf, well above Henry Hub and Mid-Continent prices, during several winters in the mid-90s.

High prices in the Northeast, signaling lack of deliverability in that area, have spurred, and are continuing to spur the building of new pipelines and expansions of numerous connections with producing basins. Iroquois Pipeline and Maritimes & Northeast are two big ones that come to mind. Both of these are currently expanding further because gas prices are continuing to spike in New York City this summer (with little correlation to Henry Hub or the producing basins).

The Henry Hub is a good general measure of the gas supply available to much of the United States. But it doesn’t say a thing about where to deliver the gas. Producing basin prices give some indication, but no specifics, as to where the extra pull on supplies is coming from. Producing basin prices also can be indicative of other factors. For instance, currently Rockies prices are relatively low (basis blowout) because there isn’t enough takeaway pipeline capacity.

The Commission itself, in its recent report on problems with the western infrastructure, found gas was running near peak capacity on lines to the West Coast and included graphs under the heading “Poor pipeline gas allocation schemes and limited pipeline capacity exacerbate price volatility at market hubs during periods of high demand.” The graphs show price spikes at Stanfield, Malin and Topock during the 2000-2001 time period in question (see Daily GPI, July 18).

As to pipeline capacity, last week’s 106-page report devoted just a few lines to the facts leading up to the western power crisis, including an explosion just prior to that questionable period that took an El Paso mainline out of service for an extended time and seriously set back storage fill. There also was the drought-induced hydropower shortage that drove the West suddenly to greater reliance on gas-fired generation, and the fact that no new power generation facilities had been built in California in the previous 12 years, and the demands on the existing ones caused them to break down. Add to that an infamous power market restructuring plan that had been massacred by the state legislature, and you had what has been called “the perfect storm.”

Nevertheless, FERC staff offered another reason for discounting the spiking California delivered prices. They say they have indications that market manipulation by some firms, and faulty survey practices by publications led to the “reported” price spikes at the California border. Again, there’s a disconnect. If those marketing firms were so wildly successful in reaping the rewards of artificially inflated prices, why are they now in trouble for allegedly covering up massive losses, and why are so many of them in bankruptcy or close to it?

While we understand that our reputation is only an auxiliary casualty in the FERC’s decades-long battle with California, we at NGI, resent the back-handed swat at pricing publications which refused to hand over transaction specific information. After years of depending on these same prices — and previous investigations of our methods and results by FERC and other government agencies — the Commission suddenly finds our information lacking. The Commission is well aware that the only way publications can conduct this type of survey is by pledging confidentiality, and the way we guarantee it is through the First Amendment rights accorded to a free press.

That being the case, the only outside validation we have is the continued use of our survey results by industry, both buyers and sellers, who check our reports against their own experience in the market. We have been around long enough (1981) to see the industry vote with their feet when other publications lost credibility through the failure of their surveys to actually track what is going on in the market. Our internal validation — and the reason we sleep nights — comes from our well-honed method of processing the numbers and the fact that our veteran price reporters have become extremely tuned to the market and do not hesitate to throw out quotes that we cannot verify.

We note that FERC is still prepared to use published prices covering other areas, indicating they give some credibility to the private price surveys. If the Commission can prove that some of the high California prices were the result of manipulation, they have the means, and the reams of data supplied by all the parties, to add up the illicit transactions and calculate a percentage that could be ascribed to phony transactions. Throwing out the totality of the reported prices smacks of a quick and very dirty solution to the problem of refilling the California treasury.

If the Commissioners vote to continue on this course, they should be aware of the impact their action could have in furthering the destruction of the wholesale gas and power market and many of its participants. And it’s not clear who would want to participate in a market in which contracts mean nothing and price signals are labeled “unreliable” when it is convenient. How many other transactions could be unraveled by the Commission’s pronouncements? The ripple effect could be significant. State officials in California already have made a shambles of their market, throwing their energy future in doubt. Is that to be the fate of the rest of the country?

There is also the report’s expressed desire for more “reliable” price information, on the order of Nymex, where every transaction is tracked under the guidance of the Commodity Futures Trading Commission. To get that kind of perfect world in the physical market, would require a law ordering companies to report all their transactions and millions of dollars for the systems to process the data in a timely manner. So far the electronic trading platforms, which might be expected to fill the gap, all have some connection with market participants, a fact that has been duly noted by the industry, which doesn’t want another EnronOnline.

FERC also should be apprised of the fact that Nymex incorporates reported prices at various points, including the California border, from NGI and other publications in its new basis swap contracts.

The federal government, of course, could fund a price survey to be operated by its own bureaucracy. When EIA gets its storage surveys straightened out, they might possibly want to take a stab at daily prices?

By Ellen Beswick, Editor/Publisher

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